2016 Annual Report
This annual report contains forward-looking statements
related to anticipated
financial performance, product
development and similar matters. Securities laws provide
a safe harbor for such statements. The company notes that
risks inherent in its business and a variety of factors could
cause or contribute to a difference between actual results
and anticipated results.
Letter to Shareholders
Sales and Marketing: Outside the Box
Board of Directors and Management
Management’s Discussion and Analysis
Report of Independent Registered Public Accounting Firm
Financial Statements
Notes to Financial Statements
Corporate Information
2
5
7
8
16
18
22
35
In last year’s letter to our shareholders, I detailed the
change in direction we initiated when we partnered
with private equity investors affiliated with Prettybrook
Partners. These investors injected over $4 million in
capital into Dynatronics in June, 2015. We are now a full
year into that partnership and our progress has been
notable. Change has been the hallmark of the past year
– and it has been calculated to build the right platform
and infrastructure to facilitate achieving our strategic
objectives. Those objectives can be generally summarized
in three stated goals.
Achieve organic growth in our existing business through
more aggressive sales management and marketing,
expanding geographic coverage domestically and
internationally,
introducing new products, and
pursuing post-acute care markets
Actively seek acquisitions within the areas of physical
therapy and athletic training that will enhance
our product offering, leverage our sales force and
potentially expand our distribution capabilities
Improve shareholder value as we achieve the first two
objectives by implementing an investor relations plan
to keep the market abreast of Dynatronics’ progress
While our objectives are simple, laying the foundation
to achieve them has required strategic planning and
measured change to better position us for success.
One of the most significant changes of this last year has
been the turnover on our board of directors. I would take
this opportunity to express appreciation to former board
members who served the company well for many years:
Howard Edwards, the late Joseph Barton, Richard Linder,
Val Christensen and Larry Beardall were all instrumental in
Letter to Shareholders
2
2016LETTER TOSHAREHOLDERS building the foundation on which our new strategic plans
of Dynatronics for almost three decades, retired in July
are being constructed.
2016, and Jim has assumed investor relations duties in
Our board as currently constituted represents a
his stead.
cross-section of men and women with significant relevant
In September 2016, we announced the appointment of
business experience. The new board members appointed
David A. Wirthlin as Chief Financial Officer (CFO), effective
this past year include:
Erin Enright – Managing Partner of Prettybrook
Partners LLC; former medical technology executive
and Managing Director of Equity Capital Markets with
Citigroup
David Holtz – Principal of Provco Group Ltd.; former
CEO of Nucryst Pharmaceuticals Corp. and former
SVP of Finance for Integra Lifesciences
October 11, 2016. Mr. Wirthlin will succeed Terry Atkinson
who will continue to serve an important role at Dynatronics
as Director of Accounting. David’s deep expertise and
experience as both a private and public company CFO
brings significant depth to the Dynatronics’ management
team.
We believe these changes have positioned us to achieve
our stated objectives. They have entailed significant
investment in the core business, which we expect will
Scott Klosterman – Executive Vice President at HNI
positively impact our financial performance in fiscal 2017
Healthcare; former Division President, COO and CFO
and thereafter.
of Chattanooga Group (a division of DJO, Inc.)
Of course, none of this change would be possible without
Brian Larkin – Senior Vice President and General
Manager at Acelity LP;
former Corporate Vice
President of Integra Lifesciences
Add to this Dr. Scott Ward, a legacy board member and
director of the physical therapy program at the University
of Utah and five-time past president of the American
Physical Therapy Association, and we believe we have a
board with expertise in the industry, finance, sales and
corporate transactions, which will help us in our efforts to
increase shareholder value.
We have also experienced significant management
changes this past year. Longtime sales and marketing
executive, Larry Beardall, whose vision and skill helped
build the company over three decades, left the company
in June 2016. Mr. Jeff Gephart was hired in March 2016 as
the senior vice president of sales and has assumed many
of Mr. Beardall’s duties. Jeff has extensive experience
in the industry, including many years as vice president
of sales with Chattanooga Group — one of our primary
competitors. Jeff has strengthened our sales management
team and instituted a strategy to build Dynatronics’
business organically. Recent hires include a new sales
manager to manage the eastern region sales territory,
and a new director to head up international sales, both of
whom had long experience with Chattanooga Group.
In August 2015 we hired Jim Ogilvie as our director of
business development. Jim’s duties are primarily focused
on our second strategic objective of growth through
acquisitions. However, his excellent analytical skills and
experience have been broadly valuable to the management
team. Most recently, Bob Cardon, who served as an officer
the support and vision of our partners at Prettybrook
Partners. We could not ask for a better partnership than
what we have developed with Prettybrook.
For the second consecutive fiscal year, we realized
revenue increases. Growth in fiscal year 2016 was over 4
percent, compared to approximately 6 percent for fiscal
year 2015 and in contrast to the approximately 7 percent
sales declines we experienced during the two previous
fiscal years. We believe we can achieve continued revenue
growth in fiscal year 2017.
The financial results for fiscal year 2016 reflect the
strategic investments I have outlined. The company reported
a net loss applicable to shareholders of $2,275,000. Of
that amount, we recorded one time severance expenses
of $768,000, and we booked an inventory write-down of
approximately $270,000 due primarily to non-performing
inventory purchased for a GPO contract two years ago.
An additional $372,000 in expense was associated with
non-cash dividends to preferred shareholders, which were
paid in common stock. These three factors account for
$1,410,000 of the $2,275,000 reported loss applicable to
stockholders. The remaining approximately $900,000 in
losses were in large part attributable to expenses related
to new employees and other strategic decisions designed
to build a solid platform for achieving our objectives in
fiscal year 2017.
Our cash position decreased during the year from
almost $4 million to approximately $1 million. Of this $3
million decline, $2.2 million was the repayment of debt,
including retiring our working capital line of credit. The
balance of the cash use was related to capital expenditures
as well as financing operating losses during the year.
3
Letter to Shareholders
Despite the decrease in cash during the year, we believe
that our cash position is adequate to fund operations for
the coming year. In addition to the cash on the balance
sheet, we put a $1.0 million working capital line of credit in
place in September of 2016. We believe that our existing
revenue stream, current capital resources, together
with the working capital line of credit will be more than
sufficient to fund operations.
Dynatronics today looks very different than the
company of the past. Fiscal year 2016 was a year of
change, restructuring and repositioning to better execute
on our strategic plans. The changes have been significant
and somewhat costly as we reorganized and augmented
the company’s management and supporting personnel.
We enter fiscal 2017 confident that Dynatronics is well on
its way to achieving our strategic objectives.
KELVYN H. CULLIMORE, JR.
Chairman, President and CEO
Letter to Shareholders
4
g
a r k e tin
S ale s & M
x
o
e B
u tsid e t h
O
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Letter to Shareholders SALES AND MARKETING: OUTSIDE THE BOX
SALES
We are implementing an inbound marketing strategy to deliver
The reorganization of our sales force has been designed
qualified leads to our sales force beginning in November and
to create a scalable platform for future growth. We have
December of 2016. This new strategy is focused on a redesign
implemented a sales management system to provide not only
of our website, strategic trade shows and targeted marketing
the area sales representatives but also the management team
campaigns within our core markets. These programs are being
with better insight into short- and long-term sales forecasting.
implemented according to the market research we have just
The objective is to increase sales force efficiency by focusing
completed. Moving forward, all marketing programs will be
efforts on revenue drivers.
designed around a clearly defined strategy and measured to
In fiscal year 2017 we are launching several new products,
achieve the greatest ROI. In addition to generating leads for our
which will help drive new growth domestically and interna-
sales force, this inbound marketing strategy will increase our
tionally. The September 2016 launch of our new Dynatron®
brand awareness in core markets.
125B Stand-Alone Ultrasound and the July launches of the
redesigned iBox™ Iontophoresis unit and the Dynatron
Our inbound marketing plan is built around these strategies:
Solaris® Plus line nicely complement our modality portfolio.
Creating new customer acquisitions by increasing traffic
Additionally, products in the R&D pipeline are scheduled for
to our website, utilizing search engine optimization (SEO)
release in the last half of fiscal year 2017.
tools, social media monitoring and blogging platforms
Converting the traffic on our website and at tradeshows to
sales by offering problem-solving solutions
We continue to enhance distribution in all U.S. and
international markets. Domestically, we will add sales repre-
sentatives to increase penetration into key markets. Also,
we are increasing efforts to partner with key distributors for
Personalizing the remarketing process by using website
our core manufactured products such as tables, hot/cold
behavior and individual user data to personalize email
products and the 25 Series™ of therapeutic modalities. Inter-
campaigns
Implementing a new customer tracking system to more
accurately capture customer data, providing an increased
level of customer service
x
o
e B
u tsid e t h
O
125B
nationally, we are assessing key markets where we can add
distributors most efficiently, based on market opportunities.
Our sales force is refocusing on our core markets of
physical therapy, chiropractic and athletic training. Within
the physical therapy space we are developing a strategy
that targets the post-acute care market. The post-acute care
market (more commonly known as long-term care) continues
to expand, and the demand for rehabilitation services
within these facilities is also growing. Dynatronics’ extensive
portfolio of products gives us a unique
opportunity
to compete
for
contracts large and small.
With our reorganized
sales
force, expanding
domestic and international
coverage, the introduction
of new products and
the refocus on our core
competencies in physical therapy,
Dynatronics is poised for meaningful growth.
Sales and Marketing: Outside the Box
6
MANAGEMENT
DISCUSSION
AND ANALYSIS
BOARD OF DIRECTORS
Pictured below, in order from left to right
Kelvyn H. Cullimore, Jr.
Chairman, President and CEO
Erin S. Enright
Managing Partner of Prettybrook Partners, LLC
David B. Holtz
Principal of Provco Group Ltd.
Scott A. Klosterman
Executive Vice President at HNI Healthcare
Brian M. Larkin
Senior Vice President of Acelity LP
R. Scott Ward, Ph.D.
Chairman of the Department of Physical Therapy at the University of Utah
MANAGEMENT TEAM
Kelvyn H. Cullimore, Jr.
Chairman, President and CEO
David A. Wirthlin
Chief Financial Officer
T. Jeff Gephart
Senior Vice President of Sales
Douglas G. Sampson
Vice President of Production and R&D
Bryan D. Alsop
Vice President of Information Technology
7
Board of Directors and Management
MANAGEMENT
DISCUSSION
AND ANALYSIS
The following discussion should be read in conjunction with our
consolidated financial statements and notes to those consolidated
financial statements, included elsewhere in our Annual Report
on Form 10-K filed with the Securities and Exchange Commision
on Sept. 28, 2016. In addition to historical information, this
discussion contains forward-looking statements that involve risks,
uncertainties and assumptions that could cause actual results to
differ materially from our expectations. Factors that could cause or
contribute to those differences include, but are not limited to, those
identified below and those discussed in the section of the Annual
Report entitled “Item 1A. Risk Factors.”
OVERVIEW
Our principal business is the manufacturing, distribution and
marketing of physical medicine products. We offer a broad line of
medical equipment including therapy devices, medical supplies
and soft goods, treatment tables and rehabilitation equipment.
Our products are sold to and used primarily by physical
therapists, chiropractors, sports medicine practitioners, and
podiatrists. Our fiscal year ends on June 30. Reference to fiscal
year 2016 refers to the year ended June 30, 2016.
RESULTS OF OPERATIONS
Fiscal Year 2016 Compared to Fiscal Year 2015
Net Sales
Net sales in fiscal year 2016, increased $1.3 million or 4.4%
to $30.4 million, compared to $29.1 million in fiscal year
2015. Net sales in the fourth quarter of fiscal year 2016
increased approximately $260,000 or 2.8% to $8.1 million,
compared to $7.9 million in the fourth quarter of 2015. The
rate of sales growth throughout fiscal 2016 was driven by new
Management’s Discussion and Analysis of Financial Condition
8
clinic openings, clinic expansions, and addition of new sales
therapeutic devices. Increasing sales of capital equipment
management and personnel, as well as strengthening demand
products will be one of the keys to improving gross profit
in our core domestic market. Sales of capital equipment (both
margins going forward.
proprietary and distributed), especially the Dynatron Solaris®
line of products, were the leading growth categories in 2016.
Selling, General and Administrative Expenses
We believe that the upward trend in sales indicates increased
Selling, general and administrative, or SG&A expenses, were
customer confidence in our markets.
about $11.0 million or 36.1% of net sales in fiscal year 2016,
Sales of proprietary manufactured physical medicine
compared to $9.2 million or 31.7% of net sales in fiscal year
products represented approximately 44% of total physical
2015. During the fourth quarter of fiscal year 2016, we
medicine product sales in fiscal years 2016 and 2015.
recorded approximately $770,000 in expense related to the
Distribution of products manufactured by other suppliers
severance of two executives. These payments will be made
accounted for the balance of our physical medicine product
through a combination of cash and common stock over a two
sales in those years.
year period. We do not anticipate severance charges at these
In fiscal years 2016 and 2015, sales of physical medicine
levels to continue in the future.
products accounted for 91.7% and 91.4%, respectively.
The increase in SG&A expenses exclusive of severance
Chargeable repairs, billable freight and a small amount
costs include: (1) approximately $400,000 in increased
of revenue from products outside of physical medicine
selling expense related primarily to several new hires in
accounted for the balance of revenues in both years.
sales management and higher commission expense; (2)
During the fiscal year ended June 30, 2016, we
approximately $300,000 of increased administrative expense
phased out the sales of our aesthetic product line known
related primarily to higher insurance costs, new hires, and
as Synergie®. In fiscal years 2016 and 2015, sales of
increased regulatory costs; and (3) approximately $300,000 of
Synergie® were approximately $110,000 and $160,000,
expense resulting from new initiatives related to our corporate
respectively. These sales were included in the non-physical
strategy, including Board of Directors fees, director and officer
medicine product revenue.
Gross Profit
liability insurance, investor relations services, and business
development activities. We anticipate the costs associated
with the new initiatives under (3) to continue at about the same
Gross profit totaled $10.4 million, or 34.0% of net sales, in
levels into fiscal 2017.
fiscal year 2016, compared to $9.1 million, or 31.1% of net
sales, in fiscal year 2015. In fiscal year 2016, we recorded
Research and Development
a $270,000 non-cash charge to write off obsolete inventory
Research and development (R&D) expenses for 2016, were
primarily related to non-performing products purchased
$1.1 million compared to $925,000 in 2015. As a percentage
in 2014 for the Amerinet GPO contract, defective products
of net sales, R&D expense increased to 3.5% of net sales in
rejected for quality purposes, and our standard inventory
2016, compared to 3.2% of net sales in fiscal year 2015. We
allowance of $120,000 annually. We do not anticipate
continue to emphasize the importance of being a technological
significant inventory adjustment charges in the future beyond
leader in our field. The increased R&D expenses related
our standard allowance.
primarily to the introduction of new products in fiscal year
During fiscal year 2015, we also recorded approximately
2016. In the first quarter of fiscal year 2017, we introduced
$840,000 in inventory obsolescence charges above the
an upgraded version of the Dynatron Solaris® Plus and 25
standard annual inventory allowance of $120,000. This
SeriesTM of combination therapy devices. In addition, we
additional charge was due primarily to strategic decisions
introduced the new Dynatron® 125B stand-alone ultrasound
made during the fourth quarter of 2015 to discontinue,
device. In the latter part of fiscal year 2016, we released an
re-evaluate or de-emphasize some product lines.
updated version of our iontophoresis device. We also have
Exclusive of the reduction in obsolete inventory write offs,
other new products in process for introduction during fiscal
increased sales of manufactured capital and the Dynatron
year 2017. All these factors combined to increase the cost
Solaris® line of products, which carry higher-than-average
of R&D for fiscal year 2016. We believe that developing new
margins, were the primary contributors to increased gross
products is a key element in our strategy and critical to moving
profit as a percentage of net sales in 2016, compared to 2015.
purchasing momentum in a positive direction. R&D costs are
Management has developed plans for increasing gross
expensed as incurred and are expected to remain at current
profits by focusing sales on the Company’s proprietary
levels in the coming year.
9
Management’s Discussion and Analysis of Financial Condition
Interest Expense
valuation allowance of $1.4 million and $840,000 in non-cash
Interest expense decreased by approximately $40,000 in
inventory write off in excess of our allowance.
fiscal year 2016, to approximately $290,000, compared to
approximately $330,000 in fiscal year 2015. The reduction
Net Loss Applicable to Common Shareholders
in interest expense is directly related to the payoff and
Net loss applicable to common shareholders was $2.3 million
termination of our line of credit in the third quarter of fiscal year
or $0.84 per share, compared to $4.4 million, or $1.73 per
2016. Exclusive of interest on the line of credit, components of
share for the year ended June 30, 2015. Fiscal year 2015
our interest expense include imputed interest from the sale/
included a deemed dividend of $2.1 million associated with a
leaseback of our corporate headquarters facility, mortgage
beneficial conversion feature triggered by the sale of our Series
interest on our Tennessee property and a small amount
A Preferred to affiliates of Prettybrook as detailed in our report
of interest for equipment loans for office furnishings and
filed on form 10-K for the fiscal year ended June 30, 2015. Also
vehicles. Most of the $290,000 interest expense in fiscal year
included in the net loss applicable to common shareholders in
2016 ($220,000) was imputed interest related to the lease.
fiscal year 2015 was a valuation allowance against deferred tax
assets of $1.4 million.
Loss Before Income Tax Benefit
In fiscal year 2016, the net loss applicable to common
Pre-tax loss in fiscal year 2016 was $2.0 million, compared to
shareholders included a valuation allowance against deferred
$1.4 million in fiscal year 2015. The increase in pre-tax loss
tax assets of approximately $745,000. Fiscal year 2016
is due primarily to (1) $770,000 in severance expense payable
also included recognition of dividends paid on our Series A
to two former executives; (2) $1.0 million increase in expenses
Preferred of $372,000 compared to $1,000 in fiscal year
associated with increased SG&A; and (3) $145,000 increase in
2015. The dividends paid in fiscal year 2016, equate to
R&D, all of which was partially offset by increased gross profit
approximately $0.13 per share.
associated with increased sales as discussed above.
Pre-tax losses in fiscal year 2015 also included incremental
inventory write offs of approximately $840,000 in excess of
LIQUIDITY AND CAPITAL RESOURCES
our $120,000 allowance, and approximately $255,000 in
We have financed operations through cash from operations
aborted acquisition expense.
Income Taxes
and available cash reserves. Working capital decreased by
$1.9 million to $5.8 million as of June 30, 2016, inclusive of the
current portion of long-term obligations and credit facilities,
Income tax benefit was approximately $65,000 in fiscal year
compared to working capital of $7.7 million as of June 30,
2016, compared to income tax provision of $850,000 in fiscal
2015. As of June 30, 2016 the Company did not have in place
year 2015. In fiscal year 2015, the Company determined the
a working capital line of credit. However, a $1.0 million working
valuation allowance was required and as a result implemented
capital line of credit facility was put in place in September of
a valuation allowance of $1.4 million all in the fourth quarter
2016 and is fully available to the Company. Current assets
of fiscal year 2015. The recording of this valuation allowance
were 63.9% of total assets as of June 30, 2016 and 69.5% of
resulted in recording a tax expense of $850,000 on the 2015
total assets as of June 30, 2015.
fiscal year financial statements. See Note 9 to the consolidated
financial statements as well as “Critical Accounting Policies
Cash and Cash Equivalents
and Estimates – Deferred Income Tax Assets” for more
Our cash and cash equivalents position as of June 30, 2016,
information regarding the valuation allowance and its impact
was approximately $1.0 million, compared to cash and cash
on the effective tax rate for 2016.
Net Loss
equivalents of $3.9 million as of June 30, 2015. During the
course of the year, we retired our line of credit in the amount
of $1.9 million, which payoff constituted a significant use of
Net loss for fiscal year 2016 was $1.9 million, compared to
cash during the year ended June 30, 2016. The balance of
$2.3 million for the year ended June 30, 2015. Our 2016
the cash used related to operations and implementation of
results include a $745,000 non-cash deferred tax asset
strategic objectives. During September 2016, we entered
valuation allowance offsetting all but $65,000 in tax benefit
into a new $1.0 million line of credit, which expires September
for the year, $770,000 severance expense, and $270,000
2017 (See Note 6 to the consolidated financial statements for
non-cash inventory write off, as discussed above. In fiscal
more information regarding the line of credit).
year 2015, the net loss included a non-cash deferred tax asset
During the current and prior year we incurred significant
Management’s Discussion and Analysis of Financial Condition
10
operating losses and negative cash flows from operations.
of credit is on stand-by status. We pay $2,000 per month as
We believe that our existing revenue stream, current capital
a minimum access fee to the line of credit. If we determine to
resources, together with the working capital line of credit
activate the line we are required to provide the lender with 45
initiated in September 2016 will be sufficient to fund operations
days’ notice of our intent to begin borrowing. The line of credit
through September 30, 2017.
has a maturity date of September 2017. The line of credit has
To fully execute on our business strategy of acquiring
no negative loan covenants. However, once the line of credit
other entities, we will need to raise additional capital. Absent
is activated there are affirmative covenants to provide regular
additional financing, we will not have the resources to execute
accounts receivable reports and financial statements within
our acquisition strategies.
90 days of month end.
Accounts Receivable
Debt
Trade accounts receivable, net of allowance for doubtful
Long-term debt, excluding current installments decreased
accounts, increased approximately $175,000, or 5.3%, to $3.5
approximately $100,000 to approximately $550,000 as of
million as of June 30, 2016, compared to $3.3 million as of
June 30, 2016, compared to approximately $650,000 as of
June 30, 2015. Trade accounts receivable represent amounts
June 30, 2015. Our long-term debt is primarily comprised of
due from our customers including medical practitioners,
the mortgage loan on our office and manufacturing facility in
clinics, hospitals, colleges and universities and sports
Tennessee. The principal balance on the mortgage loan is
teams as well as dealers and distributors that purchase our
approximately $600,000, of which $500,000 is classified as
products for redistribution. We believe that our estimate of
long-term debt, with monthly principal and interest payments
the allowance for doubtful accounts is adequate based on our
of $13,278. Our mortgage loan matures in 2021.
historical knowledge and relationship with these customers.
As discussed above, in conjunction with the sale and
Accounts receivable are generally collected within 30 days of
leaseback of our corporate headquarters in August 2014, we
the agreed terms.
Inventories
entered into a $3.8 million lease for a 15-year term with an
investor group. That sale generated a profit of $2.3 million
which is being recorded monthly over the life of the lease at
Inventories, net of reserves, decreased $425,000, or 7.8%, to
$12,500 per month, or approximately $150,000 per year. The
$5.0 million as of June 30, 2016, compared to $5.4 million
building lease is recorded as a capital lease with the related
as of June 30, 2015. During fiscal year 2016, we recorded a
amortization being recorded on a straight line basis over 15
$270,000 non-cash write off of inventory, of which $150,000
years at approximately $250,000 per year. Lease payments
was based on non-performing inventory related to our
of approximately $27,000 are payable monthly increasing at
Amerinet GPO contract and defective products rejected for
a rate of approximately 2% per year over the life of the lease.
quality purposes. Inventory levels may fluctuate based on the
Total accumulated amortization related to the leased building
timing of large inventory purchases from overseas suppliers.
is approximately $480,000 at June 30, 2016. Imputed interest
Accounts Payable
for the fiscal year ended June 30, 2016, was approximately
$200,000. Future minimum gross lease payments required
Accounts payable decreased approximately $600,000, or
under the capital lease as of June 30, 2016 are as follows:
24.0%, to $1.9 million as of June 30, 2016, from $2.5 million as
2017, $334,950; 2018, $341,648; 2019, $348,478; 2020,
of June 30, 2015. We continue to take advantage of available
$355,450; 2021, $362,566 and $3,245,126 thereafter.
early payment discounts when offered by our vendors.
Included in the above lease payments is $1.4 million of
Line of Credit
In March 2016, we retired our working capital line of credit.
Inflation
imputed interest.
That line of credit has been reinstated effective September
Our revenues and net income have not been unusually
2016, in the amount of $1.0 million. Interest on the line of credit
affected by inflation or price increases for raw materials and
is based on the prime rate plus 5%. It is collateralized by our
parts from vendors.
inventory and accounts receivable. Borrowing limitations are
based on 85% of eligible accounts receivable and $700,000
Stock Repurchase Plans
of eligible inventory. Our current borrowing base on the line of
In 2011, our Board of Directors adopted a stock repurchase
credit would be approximately $3.4 million. Presently the line
plan authorizing repurchases of shares in the open market,
11
Management’s Discussion and Analysis of Financial Condition
through block trades or otherwise. Decisions to repurchase
• Customer demand;
shares under this plan are based upon market conditions, the
• Historical sales;
level of our cash balances, general business opportunities,
• Forecast sales;
and other factors. The Board periodically approves the dollar
• Product obsolescence;
amounts for share repurchases under the plan. As of June
• Strategic marketing and production plans
30, 2016, approximately $450,000 remained available under
• Technological innovations; and
the Board’s authorization for purchases under the plan. There
• Character of the inventory as a distributed item, finished
is no expiration date for the plan. No purchases were made
manufactured item or raw material.
under this plan during the year ended June 30, 2016, or during
Any modifications to estimates of inventory valuation reserves
the past four fiscal years.
are reflected in cost of goods sold within the statements of
operations during the period in which such modifications are
determined necessary by management. As of June 30, 2016,
CRITICAL ACCOUNTING POLICIES
and 2015, our inventory valuation reserve balance, which
This Management’s Discussion and Analysis of Financial
established a new cost basis, was approximately $415,000
Condition and Results of Operations is based upon our
and $360,000, respectively, and our inventory balance was
consolidated financial statements, which have been prepared
$5.0 million and $5.4 million, net of reserves, respectively.
in accordance with GAAP. The preparation of these financial
During fiscal year 2016, we recorded a $270,000 non-cash
statements requires estimates and judgments that affect
write off of inventory based on two factors: 1) non-performing
the reported amounts of our assets, liabilities, net sales
inventory related to our Amerinet GPO contract and 2)
and expenses. Management bases estimates on historical
defective products. We do not anticipate these inventory write
experience and other assumptions it believes to be reasonable
offs in the future beyond our current allowance of $120,000
given the circumstances and evaluates these estimates on an
annually.
ongoing basis. Actual results may differ from these estimates
under different assumptions or conditions. See Note 15 to
Revenue Recognition
our consolidated financial statements for the impact of recent
Our sales force and distributors sell our products to end users,
accounting pronouncements.
including physical therapists, professional trainers, athletic
We believe that the following critical accounting policies
trainers, chiropractors, and medical doctors. Sales revenues
involve a high degree of judgment and complexity. See Note 1
are recorded when products are shipped FOB shipping point
to our consolidated financial statements for fiscal year 2016,
under an agreement with a customer, risk of loss and title
for a complete discussion of our significant accounting policies.
have passed to the customer, and collection of any resulting
The following summary sets forth information regarding
receivable is reasonably assured. Amounts billed for shipping
significant estimates and judgments used in the preparation of
and handling of products are recorded as sales revenue.
our consolidated financial statements.
Costs for shipping and handling of products to customers are
recorded as cost of sales.
Inventory Reserves
The nature of our business requires that we maintain sufficient
Allowance for Doubtful Accounts
inventory on hand at all times to meet the requirements of our
We must make estimates of the collectability of accounts
customers. We record finished goods inventory at the lower
receivable. In doing so, we analyze historical bad debt trends,
of standard cost, which approximates actual cost (first-in,
customer credit worthiness, current economic trends and
first-out) or market. Raw materials are recorded at the lower of
changes in customer payment patterns when evaluating the
cost (first-in, first-out) or market. Inventory valuation reserves
adequacy of the allowance for doubtful accounts. Our accounts
are maintained for the estimated impairment of the inventory.
receivable balance was $3.5 million and $3.3 million, net of
Impairment may be a result of slow-moving or excess
allowance for doubtful accounts of $390,000 and $415,000,
inventory, product obsolescence or changes in the valuation
as of June 30, 2016, and 2015, respectively.
of the inventory. In determining the adequacy of reserves, we
analyze the following, among other things:
Deferred Income Tax Assets
• Current inventory quantities on hand;
uncertainty as to the realizability of deferred tax assets. The
• Product acceptance in the marketplace;
realization of deferred tax assets is dependent upon our ability
A valuation allowance is required when there is significant
Management’s Discussion and Analysis of Financial Condition
12
to generate sufficient taxable income within the carryforward
BUSINESS PLAN AND OUTLOOK
periods provided for in the tax law for each tax jurisdiction. We
Over the past 12-months we have been working closely with
have considered the following possible sources of taxable income
Prettybrook to execute on our current business plan. We
when assessing the realization of our deferred tax assets:
have strengthened the core operations through executive
• Future reversals of existing taxable temporary differences;
of key sales and administrative personnel and pursued
• Future taxable income or loss, exclusive of reversing
several merger and acquisition candidates. We believe the
temporary differences and carryforwards;
realization of these initiatives will be manifest during fiscal
• Tax-planning strategies; and
2017. Our key objectives in the coming year are as follows:
management changes, new product innovations, addition
• Taxable income in prior carryback years.
We considered both positive and negative evidence in
management, new product introductions, geographic
determining the continued need for a valuation allowance,
expansion both domestic and
international and
including the following:
expansion into post-acute care markets;
• Achieve organic sales growth through improved sales
Positive evidence:
• Identify and act on acquisition opportunities that will
further enhance our product offering, distribution
• Current forecasts indicate that we will generate pre-tax
coverage and leverage our current sales network to
income and taxable income in the future. However, there
improve gross profit margins; and
can be no assurance that the new strategic plans will
• Improve our investor relations efforts in order to better
result in profitability.
alert the market to our strategic growth objectives.
• A majority of our tax attributes have indefinite
carryover periods.
Negative evidence:
A key element of our business plan was to bring greater
emphasis to our sales efforts. In March 2016, we hired
Thomas J. (Jeff) Gephart as Senior Vice President of Sales.
• We have several years of cumulative losses as of
Mr. Gephart spent almost a decade as Vice President
June 30, 2016.
of Sales for Chattanooga Group, our largest competitor,
managing their extensive sales network. Subsequently, he
We place more weight on objectively verifiable evidence
worked as Director of Sales and Marketing in the US market
than on other types of evidence and management currently
for Zimmer MedizinSystems, a German manufacturer of
believes that available negative evidence outweighs the
rehabilitation products and, most recently, as Director of
available positive evidence. We have therefore determined
Sales and Marketing for Gebauer Corporation, where he
that we do not meet the “more likely than not” threshold that
supervised sales, marketing and customer service for their
deferred tax assets will be realized. Accordingly, a valuation
worldwide operations. He brings to the Company both
allowance is required. Any reversal of the valuation allowance
market expertise and significant experience in building
will favorably impact the Company’s results of operations in
sales organizations. Enhancing our sales network is critical
the period of reversal.
for our success as we acquire companies and build the
At June 30, 2015, and June 30, 2016, we recorded
platform. We are confident that he is the right leader to
valuation allowances against our deferred tax assets. In
strengthen both the sales and marketing organization.
fiscal year 2015, we recorded a full valuation allowance
In addition to Jeff’s management expertise, other key
against deferred tax assets. In fiscal year 2016, we recorded
hires have been made to push sales growth. A new Eastern
a valuation allowance against all but approximately $65,000
Sales Region was created and we hired a new sales manager
of deferred tax assets. The residual tax benefit left in fiscal
to manage that territory. This hire was previously a regional
year 2016 is attributed to reconciliation of all tax accounts at
sales manager for one of our largest competitors, DJO
the fiscal year end allowing us to true up the full allowance
Global. He brings significant experience, product knowledge
deemed necessary for the period. Future valuation allowances
and customer relationships to the job. We also hired a new
or recapture of existing allowances will depend on analysis of
director to head up international sales for the Company in
positive and negative evidence at the time of reporting.
light of the pending retirement of the Company’s founder
The Company’s federal and state income tax returns for
who had previously been managing International Sales on
June 30, 2013, 2014, and 2015, are open tax years.
a part-time basis. Our new director of international sales
13
Management’s Discussion and Analysis of Financial Condition
established a global training program for sales representa-
combination therapy device;
tives at DJO Global and Chattanooga Group. Over the past
• Improving gross profit margins by, among other
10 years he led the technical sales support effort globally
initiatives, increasing market share of manufactured
and is certified as a Lean and Kaizen facilitator.
capital products by promoting sales of our state-of-the-
We will release several new product innovations during
art Dynatron® ThermoStim probe, Dynatron Solaris®
fiscal 2017 to strengthen our current product offering and to
Plus and 25 SeriesTM products;
expand our product portfolio. In August 2016, we completed
• Maintaining our position as a technological leader and
the release of our upgraded Dynatron Solaris® Plus and 25
innovator in our markets through the introduction of new
SeriesTM product lines as well as the release in September
products during the new fiscal year;
2016, of the Dynatron® 125B stand-alone ultrasound. We
• Increasing international sales by (1) leveraging the
believe these innovations will have a meaningful contribution
CE Mark approval in Europe and other countries by
to our performance in the next 12-months.
identifying appropriate distributors for the approved
In the last several months we have announced
products, (2) Finalizing regulatory approvals in countries
restructuring changes to the core Dynatronics management
such as China, Mexico, Peru and other countries in
team. In June 2016, Larry K. Beardall, Executive Vice
Southeast Asia, and (3) further developing relationships
President of Marketing and Strategic Planning and member
with existing distributors in countries such as Japan in
of the Board of Directors left Dynatronics. His duties have
order to increase sales in those countries where products
been assumed by Mr. Gephart who has extensive experience
are approved;
in marketing and strategic planning. In July 2016, Bob
• Exploring strategic business acquisitions. This will
Cardon, Vice President of Administration announced his
leverage and complement our competitive strengths,
retirement. In August 2015, we hired a new director to
increase market reach and allow us to potentially expand
manage the Company’s business development strategy.
into broader medical markets; and
These changes in executive management are designed to
• Attending strategic conferences to make investors aware
more effectively pursue the corporate strategies articulated
of our strategic plans, attract new capital to support
in this business plan – particularly the business development
the business development strategy and identify other
strategies.
acquisition targets
We are actively pursuing an acquisition strategy to
consolidate other small manufacturers and distributors in
Market Information
our core markets (i.e. physical therapy, athletic training,
As of September 22, 2016, we had approximately 2,846,678
and chiropractic). We are primarily seeking candidates that
shares of common stock issued and outstanding. Our
fall into the following categories:
common stock is included on the NASDAQ Capital Market
• Manufacturers that extend our product portfolio
and low sales prices for our common stock as quoted on the
• Distributors that extend geographic reach or provide
NASDAQ system for the quarterly periods indicated.
(symbol: DYNT). The following table shows the range of high
different channel access
• Tuck-in manufacturers / distributors in adjacent markets
(i.e. Orthopedics, Sports Medicine, Podiatry, etc.)
Fiscal Year
Ended June 30:
2016
2015
In summary, based on our defined strategic initiatives
we are focusing our resources in the following areas:
High
Low
High
Low
1st Quarter Jul-Sep
$4.44
$2.65
$5.00
$3.69
• Updating and improving our selling and marketing
efforts including new sales management, new reporting
2nd Quarter Oct-Dec
$3.36
$2.76
$5.76
$3.34
tools, and focusing our sales and marketing efforts into
our core markets;
3rd Quarter Jan-Mar
$3.09
$2.56
$3.89
$2.78
• Seeking to improve distribution of our products through
recruitment of additional qualified sales representatives
4th Quarter Apr-Jun
$3.21
$2.55
$3.51
$2.70
and dealers attracted by the many new products being
offered and expanding the availability of proprietary
Management’s Discussion and Analysis of Financial Condition
14
Stockholders
As of September 22, 2016, we had approximately 520
shareholders of record. This number does not include beneficial
owners of shares held in “nominee” or “street” name by a bank,
broker or other holder of record. In addition to the shareholders
of record, we estimate that there are a total of 1,500 beneficial
owners of our common stock.
Dividends
We currently have approximately 1.6 million shares of Series
A Preferred outstanding. Dividends payable on these shares
accrue at the rate of 8% per year and are payable quarterly in
stock or cash. The formula for paying this dividend in common
stock can change the effective yield on the dividend to more or
less than 8% depending on the price of the stock at the time
of issuance.
We have never paid cash dividends on our common stock.
Our anticipated capital requirements are such that we intend
to follow a policy of retaining earnings, if any, in order to
finance the development of the business.
Purchases of Equity Securities
In February 2011, the Board of Directors approved $1,000,000
for open market share repurchases of the Company’s
common stock. Approximately $500,000 remained on this
authorization as of June 30, 2016. We did not purchase any
shares of common stock during the year ended June 30, 2016
or in the prior four fiscal years.
Preferred Stock
In June 2015, we raised approximately $4.0 million in
equity financing. The purchasers of these securities included
affiliates of Prettybrook Partners, LLC (“Prettybrook”) and
certain other purchasers (collectively with Prettybrook, the
“Preferred Investors”). The Preferred Investors purchased
1,610,000 shares of our Series A Preferred and received (i)
A-Warrants, exercisable by cash exercise only, to purchase
1,207,500 shares of our common stock, and (ii) B-Warrants,
exercisable by “cashless exercise”, to purchase 1,207,500
shares of our common stock. Proceeds from this financing are
to be used to promote organic growth of the Company through
expansion of our sales distribution channels both domestically
and internationally, improve infrastructure and operating
systems, and support strategic acquisition opportunities.
15
Management’s Discussion and Analysis of Financial Condition
BOARD OF DIRECTORS AND STOCKHOLDERS
DYNATRONICS CORPORATION
COTTONWOOD HEIGHTS, UTAH
We have audited the accompanying consolidated balance
a basis for designing audit procedures that are appropriate
sheet of Dynatronics Corporation (“Company”) as of June 30,
in the circumstances, but not for the purpose of expressing
2016 and the related consolidated statements of operations,
an opinion on the effectiveness of the Company’s internal
stockholders’ equity, and cash flows for the year then ended.
control over financial reporting. Accordingly, we express no
These financial statements are the responsibility of the
such opinion. An audit also includes examining, on a test
Company’s management. Our responsibility is to express an
basis, evidence supporting the amounts and disclosures in
opinion on these financial statements based on our audit.
the financial statements, assessing the accounting principles
We conducted our audit in accordance with the standards
used and significant estimates made by management, as well
of the Public Company Accounting Oversight Board (United
as evaluating the overall financial statement presentation.
States) and in accordance with auditing standards generally
We believe that our audit provides a reasonable basis for our
accepted in the United States of America. Those standards
opinion.
require that we plan and perform the audit to obtain
In our opinion, the consolidated financial statements
reasonable assurance about whether the financial statements
referred to above present fairly, in all material respects, the
are free of material misstatement. The Company is not
financial position of Dynatronics Corporation at June 30,
required to have, nor were we engaged to perform, an audit of
2016, and the results of its operations and its cash flows for
its internal control over financial reporting. Our audit included
the year then ended, in conformity with accounting principles
consideration of internal control over financial reporting as
generally accepted in the United States of America.
/s/ BDO USA, LLP
Salt Lake City, Utah
September 28, 2016
Report of Independent Registered Public Accounting Firm
16
BOARD OF DIRECTORS AND STOCKHOLDERS
DYNATRONICS CORPORATION
COTTONWOOD HEIGHTS, UTAH
We have audited the accompanying consolidated balance
procedures that are appropriate in the circumstances, but not
sheet of Dynatronics Corporation and subsidiary as of June 30,
for the purpose of expressing an opinion on the effectiveness
2015 and the related consolidated statements of operations,
of the Company’s internal control over financial reporting.
stockholders’ equity, and cash flows for the year then ended.
Accordingly, we express no such opinion. An audit includes
These financial statements are the responsibility of the
examining, on a test basis, evidence supporting the amounts
Company’s management. Our responsibility is to express an
and disclosures in the financial statements, assessing the
opinion on these financial statements based on our audit.
accounting principles used and significant estimates made
We conducted our audit in accordance with the standards
by management, as well as evaluating the overall financial
of the Public Company Accounting Oversight Board (United
statement presentation. We believe that our audit provides a
States). Those standards require that we plan and perform
reasonable basis for our opinion.
the audit to obtain reasonable assurance about whether
In our opinion, the consolidated financial statements
the financial statements are free of material misstatement.
referred to above present fairly, in all material respects, the
The Company is not required to have, nor were we engaged
financial position of Dynatronics Corporation as of June 30,
to perform, an audit of its internal control over financial
2015, and the results of its operations and cash flows for the
reporting. Our audit included consideration of internal
year then ended, in conformity with accounting principles
control over financial reporting as a basis for designing audit
generally accepted in the United States of America.
/s/ Mantyla McReynolds, LLC
Salt Lake City, Utah
September 28, 2015
Report of Independent Registered Public Accounting Firm
17
Balance Sheets
Years ended June 30:
Assets
Current assets:
2016
2015
Cash and cash equivalents
Trade accounts receivable, less allowance for doubtful accounts of
$389,050 as of June 30, 2016 and $471,444 as of June 30, 2015
$
966,183
3,523,731
3,925,967
3,346,770
Other receivables
Inventories, net
Prepaid expenses
Prepaid income taxes
Total current assets
Property and equipment, net
Intangible asset, net
Other assets
10,946
4,997,254
256,735
—
6,748
5,421,787
273,629
338,108
9,754,849
13,313,009
4,777,565
5,025,076
160,123
580,161
190,803
623,342
Total assets
$
15,272,698
19,152,230
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt
Current portion of capital lease
Current portion of deferred gain
Line of credit
Warranty reserve
Accounts payable
Accrued expenses
Accrued payroll and benefits expenses
Income tax payable
$
137,283
183,302
150,448
121,884
173,357
150,448
—
1,909,919
152,605
153,185
1,914,342
2,520,327
358,787
1,034,688
2,895
279,547
263,092
—
Total current liabilities
3,934,350
5,571,759
Long-term debt, net of current portion
Capital lease, net of current portion
Deferred gain, net of current portion
Deferred rent
Deferred income tax liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
553,191
3,281,547
1,830,449
85,151
—
651,118
3,464,850
1,980,897
41,150
136,128
9,684,688
11,845,902
—
—
Preferred stock, no par value: Authorized 5,000,000 shares; 1,610,000 shares
3,708,152
3,728,098
issued and outstanding at June 30, 2016 and June 30, 2015, respectively
Common stock, no par value: Authorized 50,000,000 shares;
7,545,880
6,969,700
2,805,280 shares and 2,642,389 shares issued and outstanding
at June 30, 2016 and June 30, 2015, respectively
Accumulated deficit
(5,666,022)
(3,391,470)
Total stockholders’ equity
5,588,010
7,306,328
Total liabilities and stockholders’ equity
$
15,272,698
19,152,230
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18
Dynatronics Corporation Consolidated Balance Sheets June 30, 2016 and 2015
Statements of Operations
Years ended June 30:
Net sales
Cost of sales
Gross profit
Selling, general, and administrative expenses
Research and development expenses
2016
2015
$
30,411,757
29,117,528
20,057,614
20,048,069
10,354,143
9,069,459
10,978,606
9,229,405
1,070,383
926,954
Operating loss
(1,694,846)
(1,086,900)
Other Income (expense):
Interest income
Interest expense
Other income, net
2,885
4,920
(289,149)
(330,842)
14,298
13,577
Total other income (expense)
(271,966)
(312,345)
Loss before income tax benefit
(1,966,812)
(1,399,245)
Income tax (provision) benefit
64,551
(851,092)
Net loss
$
(1,902,261)
(2,250,337)
Deemed dividend on 8% convertible preferred stock
8% Convertible preferred stock dividend, in common stock
8% Convertible preferred stock dividend, in cash
Net loss applicable to common stockholders
Basic and diluted net loss per common share
—
(2,109,971)
(372,291)
—
—
(882)
$
$
(2,274,552)
(4,361,190)
( 0.84)
( 1.73)
Weighted-average basic and diluted common shares outstanding:
2,706,424
2,520,723
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Dynatronics Corporation Consolidated Statements of Operations Years Ended June 30, 2016 and 2015
19
Statements of Stockholders’ Equity
Years ended June 30,
2016 and 2015
Common
Common
Preferred
Preferred
Total
Stock
Shares
Stock
Amount
Stock
Shares
Stock
Accumulated
Stockholders’
Amount
Deficit
Equity
Balances as of July 1, 2014
2,520,389
$
7,149,812
— $
Stock-based compensation
—
66,372
Issuance of common
122,000
394,060
—
—
stock in association
with capital raise
—
—
—
(1,141,133) $ 6,008,679
—
—
66,372
394,060
Issuance of preferred
—
(640,544)
1,610,000
3,728,980
—
3,088,436
stock and warrants,
net of issuance costs
Preferred stock
dividend, in cash
Preferred stock beneficial
conversion feature
Dividend of beneficial
conversion feature
Net loss
—
—
—
—
—
—
—
—
—
(882)
—
(882)
—
2,109,971
—
2,109,971
—
(2,109,971)
—
(2,109,971)
—
—
(2,250,337)
(2,250,337)
Balances as of June 30, 2015
2,642,389
$
6,969,700
1,610,000
$
3,728,098
(3,391,470) $
7,306,328
Stock-based compensation
71,596
203,889
Issuance of preferred
stock and warrants,
net of issuance costs
—
—
Preferred stock dividend,
91,295
273,375
in common stock
Preferred stock
dividend, in common
stock, to be issued
Net loss
Balances as of
June 30, 2016
—
98,916
—
—
—
—
—
—
—
—
(19,946)
—
—
203,889
(19,946)
—
(273,375)
(98,916)
—
—
—
—
(1,902,261)
(1,902,261)
2,805,280
7,545,880
1,610,000
3,708,152
(5,666,022)
5,588,010
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20
Dynatronics Corporation Consolidated Statements of Stockholders’ Equity Year’s Ended June 30, 2016 and 2015
Statements of Cash Flows
Years ended June 30:
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment
Amortization of intangible assets
Amortization of other assets
Amortization of building lease
Gain on sale of assets
Stock-based compensation expense
Change in deferred income taxes
Change in provision for doubtful accounts receivable
Change in provision for inventory obsolescence
Deferred gain on sale/leaseback
Change in operating assets and liabilities:
Receivables, net
Inventories, net
Prepaid expenses
Other assets
Income tax payable
Prepaid income taxes
Accounts payable and accrued expenses
2016
2015
$
(1,902,261)
(2,250,337)
229,930
30,680
51,372
251,934
4,703
203,889
(136,128)
(28,394)
57,213
350,959
44,637
51,372
230,939
—
66,372
848,691
92,089
23,190
(150,448)
(137,910)
(152,765)
367,320
16,894
(8,191)
2,895
341,003
285,377
(264,617)
712,871
(265,968)
(278,258)
(368,560)
—
79,022
Net cash used in operating activities
(534,977)
(1,065,508)
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of property and equipment
(195,946)
(66,333)
—
3,800,000
Net cash provided by (used in) investing activities
(195,946)
3,733,667
Cash flows from financing activities:
Principal payments on long-term debt
Principal payments on long-term capital lease
Net change in line of credit
Proceeds from issuance of preferred stock, net
(125,638)
(173,358)
(784,405)
(161,793)
(1,909,919)
(1,611,290)
(19,946)
3,482,496
Net cash provided by (used in) financing activities
(2,228,861)
925,008
Net change in cash and cash equivalents
(2,959,784)
3,593,167
Cash and cash equivalents at beginning of the period
3,925,967
332,800
Cash and cash equivalents at end of the period
966,183
3,925,967
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosures of non-cash flow investing and financing activities:
Capital lease - building
Capital lease and note payable obligations incurred to acquire property and equipment
8% preferred stock dividend, in common stock
Deemed dividend on 8% convertible preferred stock
Preferred stock issuance costs paid in common stock
307,644
—
—
43,110
372,291
—
—
324,314
356,151
3,800,000
—
—
2,109,971
394,060
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Dynatronics Corporation Consolidated Statements of Cash Flows Years Ended June 30, 2016 and 2015
21
NOTES TO
FINANCIAL
STATEMENTS
(1) BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Dynatronics Corporation (the Company), a Utah corporation,
distributes and markets a broad line of medical products,
many of which are designed and manufactured by the
Company. Among the products offered by the Company are
therapeutic, diagnostic, and rehabilitation equipment, medical
supplies and soft goods and treatment tables to an expanding
market of physical therapists, podiatrists, orthopedists,
chiropractors, and other medical professionals.
(b) Principles of Consolidation
The consolidated financial statements include the accounts
and operations of Dynatronics Corporation and its wholly
owned subsidiary, Dynatronics Distribution Company,
LLC. The consolidated financial statements are prepared in
conformity with accounting principles generally accepted
in the United States of America (U.S. GAAP). All significant
intercompany account balances and transactions have been
eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents include all highly liquid investments with
maturities of three months or less at the date of purchase.
Also included within cash equivalents are deposits in-transit
from banks for payments related to third-party credit card and
debit card transactions.
(d) Inventories
Finished goods inventories are stated at the lower of standard
cost (first-in, first-out method), which approximates actual
cost, or market. Raw materials are stated at the lower of
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
22
cost (first in, first out method) or market. The Company
(h) Intangible Assets
periodically reviews the value of items in inventory and
Costs associated with the acquisition of trademarks, trade
provides write-downs or write-offs of inventory based on its
names, license rights and non-compete agreements are
assessment of slow moving or obsolete inventory. Write-downs
capitalized and amortized using the straight-line method over
and write-offs are charged against the reserve.
periods ranging from 3 months to 20 years.
(e) Trade Accounts Receivable
(i) Revenue Recognition
Trade accounts receivable are recorded at the invoiced amount
The Company recognizes revenue when products are shipped
and do not bear interest, although a finance charge may be
FOB shipping point under an agreement with a customer, risk
applied to such receivables that are past the due date. The
of loss and title have passed to the customer, and collection
allowance for doubtful accounts is the Company’s best estimate
of any resulting receivable is reasonably assured. Amounts
of the amount of probable credit losses in the Company’s
billed for shipping and handling of products are recorded as
existing accounts receivable. The Company determines the
sales revenue. Costs for shipping and handling of products to
allowance based on a combination of statistical analysis,
customers are recorded as cost of sales.
historical collections, customers’ current credit worthiness,
the age of the receivable balance both individually and in the
(j) Research and Development Costs
aggregate and general economic conditions that may affect the
Direct research and development costs are expensed as
customer’s ability to pay. All account balances are reviewed on
incurred.
an individual basis. Account balances are charged off against
the allowance when the potential for recovery is considered
(k) Product Warranty Costs
remote. Recoveries of receivables previously charged off are
Costs estimated to be incurred in connection with the
recognized when payment is received.
Company’s product warranty programs are charged to
expense as products are sold based on historical warranty
(f) Property and Equipment
rates.
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight
(l) Net Loss per Common Share
line method over the estimated useful lives of the assets.
Net loss per common share is computed based on the
Buildings and their component parts are being depreciated
weighted-average number of common shares outstanding
over their estimated useful lives that range from 5 to 31.5
and, when appropriate, dilutive common stock equivalents
years. Machinery, office equipment, computer equipment
outstanding during the year. Convertible preferred stock and
and software and vehicles are being depreciated over their
stock options and warrants are considered to be common
estimated useful lives that range from 3 to 7 years.
stock equivalents. The computation of diluted net loss per
common share does not assume exercise or conversion of
(g) Long-Lived Assets
securities that would have an anti-dilutive effect.
Long–lived assets, such as property and equipment, are
Basic net loss per common share is the amount of net
reviewed for impairment whenever events or changes in
loss for the year available to each weighted-average share of
circumstances indicate that the carrying amount of an asset
common stock outstanding during the year. Diluted net loss
may not be recoverable. Recoverability of assets to be held and
per common share is the amount of net loss for the year
used is measured by a comparison of the carrying amount of
available to each weighted-average share of common stock
an asset to estimated undiscounted future cash flows expected
outstanding during the year and to each common stock
to be generated by the asset. If the carrying amount of an
equivalent outstanding during the year, unless inclusion of
asset exceeds its estimated future cash flows, an impairment
common stock equivalents would have an anti-dilutive effect.
charge is recognized for the difference between the carrying
The reconciliation between the basic and diluted weighted-
amount of the asset and the fair value of the asset. Assets to
average number of common shares for the years ended June
be disposed of are separately presented in the balance sheet
30, 2016 and 2015, is summarized as follows:
and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated.
23
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
Basic weighted-average number of common shares outstanding during the year
2,706,424
2,520,723
Weighted-average number of dilutive common stock equivalents outstanding during the year
—
—
Diluted weighted-average number of common and common equivalent shares
2,706,424
2,520,723
outstanding during the year
2016
2015
Outstanding common stock equivalents not included
(n) Stock-Based Compensation
in the computation of diluted net loss per common share
The Company accounts for stock-based compensation
totaled 4,127,814 as of June 30, 2016 and 4,105,290 as of
in accordance with FASB ASC 718, Stock Compensation.
June 30, 2015. These common stock equivalents were not
Stock-based compensation cost is measured at the grant
included in the computation because to do so would have
date based on the fair value of the award and is recognized as
been antidilutive.
(m) Income Taxes
expense over the applicable vesting period of the stock award
(generally five years) using the straight-line method.
The Company recognizes an asset or liability for the deferred
(o) Concentration of Risk
income tax consequences of all temporary differences between
In the normal course of business, the Company provides
the tax bases of assets and liabilities and their reported amounts
unsecured credit to its customers. Most of the Company’s
in the consolidated financial statements that will result in
customers are involved in the medical industry. The Company
taxable or deductible amounts in future years when the reported
performs ongoing credit evaluations of its customers and
amounts of the assets and liabilities are recovered or settled.
maintains allowances for probable losses which, when realized,
Accounting standards require the consideration of a valuation
have been within the range of management’s expectations.
allowance for deferred tax assets if it is “more likely than not”
The Company maintains its cash in bank deposit accounts
that some component or all of the benefits of deferred tax assets
which at times may exceed federally insured limits.
will not be realized. Accruals for uncertain tax positions are
As of June 30, 2016, the Company has approximately
provided for in accordance with the requirements of Financial
$716,000 in cash and cash equivalents in excess of the FDIC
Accounting Standards Board (FASB) Accounting Standards
limits. The Company has not experienced any losses in such
Codification (ASC) 740-10, Income Taxes. Under ASC 740-10, the
accounts.
Company may recognize the tax benefits from an uncertain tax
position only if it is more likely than not that the tax position will
(p) Operating Segments
be sustained on examination by the taxing authorities, based on
The Company operates in one line of business: the
the technical merits of the position. The tax benefits recognized
development, marketing, and distribution of a broad line of
in the financial statements from such a position are measured
medical products for the physical therapy markets. As such,
based on the largest benefit that has a greater than 50%
the Company has only one reportable operating segment.
likelihood of being realized upon ultimate settlement. ASC 740-10
Physical medicine products made up 92% of net sales
also provides guidance on derecognition of income tax assets
for the year ended June 30, 2016 and 91% for the year ended
and liabilities, classification of current and deferred income
June 30, 2015. Chargeable repairs, billable freight and other
tax assets and liabilities, accounting for interest and penalties
miscellaneous revenues account for the remaining 8% and
associated with tax positions, and income tax disclosures.
9% of net sales for the years ended June 30, 2016 and 2015,
Judgment is required in assessing the future tax consequences
respectively.
of events that have been recognized in the financial statements
or tax returns. Variations in the actual outcome of these future
(q) Use of Estimates
tax consequences could materially impact the Company’s
Management of the Company has made a number of estimates
financial position, results of operations and cash flows.
and assumptions relating to the reporting of assets, liabilities,
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
24
revenues and expenses, and the disclosure of contingent assets
and liabilities in accordance with US GAAP. Significant items
subject to such estimates and assumptions include the carrying
amount of property and equipment; valuation allowances for
receivables, income taxes, and inventories; accrued product
warranty costs; and estimated recoverability of intangible
assets. Actual results could differ from those estimates.
(r) Advertising Costs
Advertising costs are expensed as incurred. Advertising
expense for the years ended June 30, 2016 and 2015 was
approximately $100,900 and $93,700, respectively.
(2) INVENTORIES
(3) PROPERTY AND EQUIPMENT
Inventories consist of the following as of June 30:
Property and equipment consist of the following as of June 30:
2016
2015
2016
2015
Raw materials
Finished goods
$
2,059,048
2,086,411
Land
$
30,287
3,353,964
3,693,921
Buildings
Inventory reserve
(415,758)
(358,545)
Machinery and equipment
Office equipment
5,603,859
1,686,386
275,977
30,287
5,586,777
1,635,386
273,420
$
4,997,254
5,421,787
Computer equipment
2,102,005
1,984,046
Vehicles
253,513
247,571
Included in cost of goods sold for the years ended June 30, 2016
Less accumulated depreciation
(5,174,462)
(4,732,411)
9,952,027
9,757,487
and 2015, is a write off of slow moving and obsolete inventory
and amortization
totaling $270,000 and $952,212, respectively. The $270,000
non-cash charge during fiscal year 2016 is based on non-
$
4,777,565
5,025,076
performing inventory related to our Amerinet GPO contract and
defective product rejected for quality purposes. The $952,212
non-cash charge reflects a write off of inventory related to strategic
decisions made during the fourth quarter of fiscal 2015 resulting
in some product lines being discontinued, re-evaluated or
Depreciation expense for the years ended June 30, 2016
de-emphasized. These decisions created additional obsolescence
and 2015 was $229,930 and $350,959, respectively.
that upon analysis warranted the inventory write off.
Included in the above caption, ”Buildings” at June
30, 2016 and 2015 are assets held under a capital lease
obligation totaling $3,800,000 (gross). The net balance of the
capital lease as of June 30, 2016 and 2015 was $3,317,127
and $3,569,061, respectively. Building amortization under
the capital lease for the years ended June 30, 2016 and 2015
was $251,934 and $230,939, respectively.
25
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
(4) INTANGIBLE ASSETS
(5) WARRANTY RESERVE
Identifiable intangible assets and their useful lives consist of
A reconciliation of the change in the warranty reserve consists
the following as of June 30:
of the following for the fiscal years ended June 30:
2016
2015
2016
2015
Trade name—15 years
$
339,400
339,400
Beginning warranty
$
153,185
157,753
Domain name—15 years
Non-compete covenant
5,400
149,400
5,400
reserve balance
149,400
Warranty repairs
—4 years
Warranties issued
Customer relationships
120,000
120,000
Changes in estimated
—7 years
warranty costs
Trademark licensing
45,000
45,000
(143,934)
141,009
2,345
(145,698)
145,267
(4,137)
agreement—20 years
Backlog of orders
—3 months
2,700
2,700
Customer database
38,100
38,100
Ending warranty reserve $
152,605
153,185
—7 years
Total identifiable
intangibles
Less accumulated
amortization
700,000
700,000
(6) LINE OF CREDIT
(539,877)
(509,197)
line of credit. That line of credit has been re-instated effective
In March 2016, the Company retired its working capital
September 2016 in the amount of $1.0 million. Interest on the
line of credit is based on the prime rate plus 5%. It is collat-
Net carrying amount
$
160,123
190,803
eralized by inventory and accounts receivable. Borrowing
limitations are based on 85% of eligible accounts receivable
and $700,000 of eligible inventory. The current borrowing
base on the line of credit would be approximately $3.4
million. Presently the line of credit is on stand-by status. The
Amortization expense associated with the intangible
Company will pay $2,000 per month as a minimum access
assets was $30,680 and $44,637 for the fiscal years ended
fee to the line of credit. If the Company determines to activate
June 30, 2016 and 2015, respectively. Estimated amortization
the line it is required to provide the lender with 45 days’ notice
expense for the identifiable intangibles is expected to be
of intent to begin borrowing. The line of credit has a maturity
as follows: 2017, $30,680; 2018, $26,430; 2019, $26,430;
date of September 2017. The line of credit has no negative
2020, $26,430; 2021, $20,420 and thereafter $29,733.
loan covenants. However, once the line of credit is activated
there are affirmative covenants to provide regular accounts
receivable reports and financial statements within 90 days of
month end.
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
26
(7) LONG TERM DEBT
2017, $8,001; 2018, $8,001 and 2019, $6,001.
Long term debt consists of the following as of June 30:
The Company rents office, warehouse and storage space
and office equipment under agreements which run one year or
more in duration. The rent expense for the years ended June
2016
2015
30, 2016 and 2015 was $186,882 and $188,498, respectively.
Future minimum rental payments required under operating
6.44% promissory
$
630,901
745,562
leases that have a duration of one year or more as of June 30,
note secured by trust
deed on real property,
maturing January 2021,
payable in monthly
installments of $13,278
2016 are as follows: 2017, $54,852; 2018, $5,088 and 2019,
$2,544.
During fiscal year 2015, the office and warehouse spaces
in Detroit, Michigan and Hopkins, Minnesota were leased on an
annual/monthly basis from employees/stockholders; or entities
5.99% promissory note
39,355
—
controlled by stockholders, who were previously principals of
secured by a vehicle,
payable in monthly
installments of $833
through December 2020
Promissory note secured
20,218
27,168
by a vehicle, payable in
monthly installments
of $639 through
February 2019
the dealers acquired in July 2007. The leases are related-party
transactions with two employee/stockholders. The expense
associated with these related-party transactions totaled $70,800
expense for both fiscal years ended June 30, 2016 and 2015.
Capital Leases
On August 8, 2014, the Company sold the property that houses
its operations in Utah and leased back the premises for a term
of 15 years. The sale price was $3.8 million. Proceeds from
13.001% promissory note
—
272
the sale were primarily used to reduce debt obligations of the
secured by equipment,
payable in monthly
installments of $70
through October 2015
Company. The sale of the building resulted in a $2,269,255
gain, which is recorded in the consolidated balance sheet as
deferred gain and will be recognized in selling, general and
administrative expense over the 15 year life of the lease.
The building lease is recorded as a capital lease with
Less current portion
690,474
(137,283)
773,002
(121,884)
the related amortization being recorded on a straight line
basis over 15 years. Total accumulated amortization related
$
553,191
651,118
reflecting amortization charges of $251,934 in fiscal 2016
to the leased building at June 30, 2016 was $482,873
and $230,939 in fiscal 2015. The difference in amortization
reflects the fact that fiscal 2015 was only 11 months, being the
first year of the lease. Future minimum gross lease payments
required under the capital lease as of June 30, 2016 are as
The aggregate maturities of long term debt for each of
follows: 2017, $334,950; 2018, $341,648; 2019, $348,478;
the years subsequent to June 30, 2016 are as follows: 2017,
2020, $355,450; 2021, $362,566 and $3,245,126 thereafter.
$137,283; 2018, $146,094; 2019, $153,559; 2020, $157,646
Included in the above lease payments is $1,438,211 of
and 2021, $95,892.
imputed interest.
(8) LEASES
Operating Leases
(9) ACCRUED PAYROLL AND BENEFITS EXPENSE
As of June 30, 2016 accrued payroll and benefits expense
was $1,034,688 as compared to $263,092 for the year
The Company
leases vehicles under noncancelable
ended June 30, 2015. Included in fiscal 2016 was $767,786
operating lease agreements. Lease expense for the years
of accrued severance for two executive management officers.
ended June 30, 2016 and 2015, was $14,430 and $16,106,
respectively. Future minimum lease payments required under
noncancelable operating leases that have initial or remaining
lease terms in excess of one year as of 2016 is as follows:
27
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
(10) INCOME TAXES
Income tax benefit (provision) for the years ended June 30 consists of:
2016:
U.S. federal
State and Local
2015:
U.S. federal
State and Local
Current
—
—
—
Deferred
40,245
24,306
Total
40,245
24,306
64,551
64,551
(16,981)
14,580
(678,953)
(169,738)
(695,934)
(155,158)
(2,401)
(848,691)
(851,092)
$
$
$
$
The actual income tax benefit (provision) differs from
the “expected” tax benefit (provision) computed by applying
the U.S. federal corporate income tax rate of 34% to income
(loss) before income taxes for the years ended June 30, are
as follows:
Net deferred income
tax assets (liabilities)
– non-current:
2016
2015
2016
2015
Expected tax benefit
$
State taxes, net of
federal tax benefit
R&D tax credit
668,716
63,844
475,743
58,661
86,659
28,916
Valuation allowance
(744,724)
(1,447,247)
Incentive stock options
Other, net
(6,105)
(3,839)
(3,322)
36,157
$
64,551
(851,092)
Deferred income tax assets and liabilities related to the tax
effects of temporary differences are as follow as of June 30:
Inventory
$
57,079
67,324
capitalization for
income tax purposes
Inventory reserve
Warranty reserve
Accrued product
liability
Allowance for
doubtful accounts
162,146
59,516
5,875
139,832
59,742
9,918
151,730
162,803
Property and
$
(71,038)
(67,158)
equipment, principally
due to differences
in depreciation
Research and
development
credit carryover
Other intangibles
Deferred gain on
sale lease back
Operating loss
carry forwards
304,669
133,393
(62,448)
863,370
(68,970)
874,235
721,074
—
Valuation allowance
(2,191,973)
(1,447,247)
Total deferred income
$
—
(136,128)
tax assets (liabilities)
– non-current
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
28
A valuation allowance is required when there is significant
for June 30, 2013, 2014 and 2015 are open tax years. The
uncertainty as to the realizability of deferred tax assets. The
anticipated NOL carry ward from fiscal 2016 is $1,780,000. The
ability to realize deferred tax assets is dependent upon the
Company has not uncertain tax positions as of June 30, 2016.
Company’s ability to generate sufficient taxable income within
the carryforward periods provided for in the tax law for each
tax jurisdiction. The Company has considered the following
(11) MAJOR CUSTOMERS AND
possible sources of taxable income when assessing the
SALES BY GEOGRAPHIC LOCATION
realization of its deferred tax assets:
During the fiscal years ended June 30, 2016 and 2015, sales
• future reversals of existing taxable
The Company exports products to approximately 30
temporary differences;
countries. Sales outside North America totaled $850,200 or
• future taxable income or loss, exclusive of reversing
2.8% of net sales, for the fiscal year ended June 30, 2016
temporary differences and carryforwards;
compared to $880,500, or 3% of net sales, for the fiscal year
to any single customer did not exceed 10% of total net sales.
• tax-planning strategies; and
ended June 30, 2015.
• taxable income in prior carryback years.
The Company considered both positive and negative
(12) COMMON STOCK AND COMMON STOCK EQUIVALENTS
evidence in determining the need for a valuation allowance,
For the year ended June 30, 2016, the Company granted
including the following:
Positive evidence:
36,174 shares of restricted common stock to directors in
connection with compensation arrangements and 35,422 shares
to employees. For the year ended June 30, 2015, the Company
• Current forecasts indicate that the Company will
granted no restricted common stock to directors or officers in
generate pre-tax income and taxable income in the
connection with compensation arrangements.
future. However, there can be no assurance that
On June 30, 2015, the Company issued 122,000 shares of
the new strategic plans will result in profitability.
restricted common stock to the exclusive placement agent and
• A majority of the Company’s tax attributes
the financial advisor in conjunction with the $4 million capital
have indefinite carryover periods.
raise.
Negative evidence:
The Company maintained a 2005 equity incentive plan for
the benefit of employees, on June 29, 2015 the shareholders
• The Company has several years of
approved a new 2015 equity incentive plan setting aside 500,000
cumulative losses as of June 30, 2016.
shares. The 2015 plan was filed with the SEC on September
3, 2015. Incentive and nonqualified stock options, restricted
The Company places more weight on objectively verifiable
common stock, stock appreciation rights, and other share-based
evidence than on other types of evidence and management
awards may be granted under the plan. Awards granted under
currently believes that available negative evidence outweighs
the plan may be performance-based. As of June 30, 2015,
the available positive evidence. Management has therefore
405,404 shares of common stock were authorized and reserved
determined that the Company does not meet the “more
for issuance, but were not granted under the terms of the 2015
likely than not” threshold that deferred tax assets will be
equity incentive plan.
realized. In accordance with accounting rules, management
The Company granted 95,000 options under its 2015 equity
has implemented a full valuation allowance against all but
incentive plan during fiscal year 2016. There were no options
approximately $65,000 of the tax benefit for fiscal year 2016.
granted during fiscal year 2015. The options are granted at not
The benefit left remaining is the result of certain adjustments
less than 100% of the market price of the stock at the date of
to the deferred tax assets in the fourth quarter to true up all
grant. Option terms are determined by the board, and exercise
tax asset accounts. Any reversal of the valuation allowance
dates may range from 6 months to 10 years from the date of grant.
will favorably impact the Company’s results of operations in
The fair value of each option grant was estimated on the date
the period of reversal.
of grant using the Black Scholes option pricing model with the
The Company’s federal and state income tax returns
following assumptions:
29
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected life of options
2016
0%
63%–65%
1.83%–2.04%
10 years
The weighted average fair value of options granted during
fiscal year 2016 was $2.10.
The following table summarizes the Company’s stock
option activity during the reported fiscal years:
2016
Number of
shares
2016
Weighted
average
exercise price
Weighted
average
remaining
contractual
term
2015
Number of
shares
2015
Weighted
average
exercise price
91,152 $
5.07
3.56 years
155,604 $
6.45
95,000
—
(64,595)
3.27
—
4.74
—
—
(64,452)
—
—
8.41
5.07
Options outstanding at
beginning of the year
Options granted
Options exercised
Options canceled or expired
Options outstanding at
121,557
3.84
2.80 years
91,152
end of the year
Options exercisable at
63,940
4.75
90,520
5.48
end of the year
Range of exercise prices
at end of the year
$
1.75 – 5.55
$
1.75 – 7.10
The Company recognized $203,889 and $66,372
$203,889 stock-based compensation was $79,333 which
in stock-based compensation for the years ended June
was related to severance payments due to changes in
30, 2016 and 2015, respectively, which is included in
executive management.
selling, general, and administrative expenses in the
As of June 30, 2015 there was $293,564 of unrecognized
consolidated statements of operations. The stock-based
stock-based compensation cost that is expected to be
compensation includes amounts for both restricted
expensed over periods of four to eight years.
stock and stock options under ASC 718. Included in the
No options were exercised during the fiscal years 2016
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
30
and 2015. The aggregate intrinsic value of the outstanding
The Preferred Investors purchased a total of 1,610,000
options as of June 30, 2016 and 2015 was $3,816 and
shares of Series A Preferred Stock, and received in connection
$3,289, respectively.
with such purchase, (i) A-Warrants, exercisable by cash
exercise only, to purchase 1,207,500 shares of common stock,
(13) SERIES A 8% CONVERTIBLE PREFERRED STOCK AND
and (ii) B-Warrants, exercisable by “cashless exercise”, to
COMMON STOCK WARRANTS
purchase 1,207,500 shares of common stock. The warrants
On June 30, 2015, the Company completed a private placement
are exercisable for 72 months from the date of issuance and
with affiliates of Prettybrook Partners, LLC (“Prettybrook”)
carry a Black-Scholes put feature in the event of a change in
and certain other purchasers (collectively with Prettybrook,
control. The put right is not subject to derivative accounting
the “Preferred Investors”) for the offer and sale of shares of
as all equity holders are treated the same in the event of a
the Company’s Series A 8% Convertible Preferred Stock (the
change in control.
“Series A Preferred”) in the aggregate amount of approximately
The Company’s Board of Directors has the authority to
$4 million. Offering costs incurred in conjunction with the
cause us to issue, without any further vote or action by the
private placement were recorded net of proceeds. The Series
shareholders, up to 3,390,000 additional shares of preferred
A Preferred is convertible to common stock on a 1:1 basis. A
stock, no par value per share, in one or more series, to
Forced Conversion can be initiated based on a formula related to
designate the number of shares constituting any series, and to
share price and trading volumes as outlined in the terms of the
fix the rights, preferences, privileges and restrictions thereof,
private placement. The dividend is fixed at 8% and is payable
including dividend rights, voting rights, rights and terms
in either cash or common stock. This dividend is payable
of redemption, redemption price or prices and liquidation
quarterly and equates to an annual payment of $372,291 in cash
preferences of such series.
or a value in common stock based on the trading price of the
The Series A Preferred includes a conversion right at a
stock on the date the dividend is declared. Certain redemption
price that creates an embedded beneficial conversion feature.
rights are attached to the Series A Preferred, but none of the
A beneficial conversion feature arises when the conversion
redemption rights for cash are deemed outside the control of the
price of a convertible instrument is below the per share fair
Company. The redemption rights deemed outside the control of
value of the underlying stock into which it is convertible. The
the Company require common stock payments or an increase in
conversion price is ‘in the money’ and the holder realizes
the dividend rate. The Series A Preferred includes a liquidation
a benefit to the extent of the price difference. The issuer
preference under which Preferred Investors would receive cash
of the convertible instrument realizes a cost based on the
equal to the stated value of their stock plus unpaid dividends. In
theory that the intrinsic value of the price difference (i.e., the
accordance with the terms of the sale of the Series A Preferred,
price difference times the number of shares received upon
the Company was required to register the underlying common
conversion) represents an additional financing cost. The
shares associated with the Series A Preferred and the warrants.
conversion rights associated with the Series A Preferred issued
That registration statement filed on form S-3 went effective on
by the Company do not have a stated life and, therefore, all of
August 13, 2015.
the beneficial conversion feature amount of $2,109,971 was
The Series A Preferred votes on an as-converted basis,
amortized to dividends on the same date the preferred shares
one vote for each share of Common Stock issuable upon
were issued. The $2,109,971 dividend is added to the net loss
conversion of the Series A Preferred, provided, however, that
to arrive at the net loss applicable to common stockholders
no holder of Series A Preferred shall be entitled to cast votes
for purposes of calculating loss per share for the year ended
for the number of shares of Common Stock issuable upon
June 30, 2015.
conversion of such Series A Preferred held by such holder that
The Company paid dividends in common stock of
exceeds the quotient of (x) the aggregate purchase price paid
$273,375 during fiscal 2016 and $882 in cash for fiscal 2015.
by such holder of Series A Preferred for its Series A Preferred,
At June 30, 2016, there was $98,916 in accrued dividends
divided by (y) the greater of (i) $2.50 and (ii) the market price
payable for the quarter ended June 30, 2016.
of the Common Stock on the trading day immediately prior
to the date of issuance of such holder’s Preferred Stock.
The market price of the Common Stock on the trading day
(14) BENEFICIAL CONVERSION FEATURE ADJUSTED AND
immediately prior to the date of issuance was $3.19 per share.
RECLASSIFICATION
Based on a $4,025,000 investment and a $3.19 per share
ASC 470-20-30-8 provides that if the intrinsic value of the
price the number of Common Stock equivalents eligible for
beneficial conversion feature is greater than the proceeds
voting by Preferred shareholders is 1,261,755.
allocated to the convertible instrument, the amount of the
31
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
discount assigned to the beneficial conversion feature shall
(17) SUBSEQUENT EVENTS
be limited to the amount of the proceeds allocated to the
On July 7, 2016, the Company issued 33,305 shares of
convertible instrument. In the prior year, the Company did not
common stock as payment for the accrued “Preferred Stock
limit the amount of the beneficial conversion feature to the
Dividend.”
amount of proceeds which resulted in an overstatement of the
On September 23, 2016, the Company initiated a $1.0
dividend of the beneficial conversion feature of $748, 916. The
million working capital line of credit. For information on the
Company has corrected this error in the prior year financial
line of credit see note #6.
statements which resulted in a reduction in net loss applicable
to common stockholders from $5,110,106 to $4,361,190 and
a decrease in basic and diluted net loss per common share
(18) RECENT ACCOUNTING PRONOUNCEMENTS
from $2.03 to $1.73. Additionally, certain reclassifications
The Financial Accounting Standards Board (“FASB”) issued
to common stock and preferred stock were done to correct
Accounting Standard Update (“ASU”) 2014-09, 2015-14 and
the consolidated balance sheet and consolidated statement
2016-8 – Revenue from Contracts with Customers, which
of stockholders’ equity. These corrections and reclassifica-
provides a single, comprehensive revenue recognition model
tions had no impact to net loss, total stockholders’ equity or
for all contracts with customers. The core principal of the ASUs
the statement of cash flows. The Company has evaluated the
is that an entity should recognize revenue when it transfers
effect of this error and reclassifications, both qualitatively and
promised goods or services to customers in an amount that
quantitatively, and concluded that it did not have a material
reflects the consideration to which the entity expects to be
impact on, nor require amendment of, any previously filed
entitled in exchange for those goods or services. The ASUs
annual or quarterly statements.
also requires additional disclosure about the nature, amount,
timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments
(15) EMPLOYEE BENEFIT PLAN
and changes in judgments and assets recognized from costs
The Company has a deferred savings plan which qualifies
incurred to obtain or fulfill a contract. In July 2015, the FASB
under Internal Revenue Code Section 401(k). The plan covers
deferred the effective date of this standard. As a result, the
all employees of the Company who have at least six months
standard and related amendments will be effective for the
of service and who are age 20 or older. For fiscal years 2016
Company for its fiscal year beginning July 1, 2018, including
and 2015, the Company made matching contributions of
interim periods within that fiscal year. Early application is
25% of the first $2,000 of each employee’s contribution.
permitted, but not before the original effective date of June 1,
The Company’s contributions to the plan for 2016 and 2015
2017. Entities are allowed to transition to the new standard by
were $36,103 and $34,099, respectively. Company matching
either retrospective application or recognizing the cumulative
contributions for future years are at the discretion of the board
effect. The Company is currently evaluating the guidance,
of directors.
including which transition approach will be applied and the
estimated impact it will have on our consolidated financial
statements.
(16) LIQUIDITY AND CAPITAL RESOURCES
In March 2016, the FASB issued ASU No. 2016-09,
As of June 30, 2016, the Company had $966,183 of cash,
Compensation
- Stock Compensation
(Topic 718):
compared to $3,925,967 as of June 30, 2015. During the
Improvements to Employee Share-Based Payment Accounting
current and prior year the Company incurred significant
(“ASU 2016-09”). This ASU amends certain aspects of
operating losses and negative cash flows from operations.
accounting for share-based payments to employees, including
The Company believes that its existing revenue stream,
(i) requiring all income tax effects of share-based awards to be
current capital resources, together with the working capital
recognized in the income statement when the award vests or
line of credit initiated in September 2016 will be sufficient
settles and eliminating APIC pools, (ii) permitting employers
to fund operations through September 30, 2017. For more
to withhold the share equivalent of an employee’s maximum
information on the line of credit see note #6.
tax liability without triggering liability accounting and (iii)
To fully execute on its business strategy of acquiring other
allowing companies to make a policy election to account for
entities, the Company will need to raise additional capital.
forfeitures as they occur. ASU 2016-09 is effective for annual
Absent additional financing, the Company will not have the
reporting periods beginning after December 15, 2016 and
resources to execute its current business plan and may have
early adoption is permitted. The Company is evaluating the
to curtail its current acquisition strategy.
impact of adopting ASU 2016-09 on its financial statements,
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
32
but does not believe the new guidance will have a significant
6. An entity is required to present separately in other
impact on how it accounts for share-based payments.
comprehensive income the portion of the total change in
In February 2016, the FASB issued ASU No. 2016-02,
the fair value of a liability resulting from a change in the
Leases (Topic 842) (“ASU 2016-02”). This ASU primarily
instrument-specific credit risk when the entity has elected
provides new guidance for lessees on the accounting
to measure the liability at fair value in accordance with
treatment of operating leases. Under the new guidance,
the fair value option for financial instruments.
lessees are required to recognize assets and liabilities arising
from operating leases on the balance sheet. ASU 2016-02 also
aligns lessor accounting with the revenue recognition guidance
in Topic 606 of the Accounting Standards Codification. ASU
2016-02 is effective for annual reporting periods beginning
after December 15, 2018 with early adoption permitted and
is required to be adopted on a modified retrospective basis,
meaning the new leasing model will be applied to the earliest
year presented in the financial statements and thereafter. The
7. Separate presentation of financial assets and liabilities
by measurement category and form of financial asset is
required on the balance sheet or accompanying notes.
8. An entity should evaluate the need for a valuation
allowance on a deferred tax asset related to available-
for-sale securities in combination with the entity’s other
deferred tax assets
Company is currently evaluating the impact of adopting this
For public business entities, the amendments in this
new accounting standard on its financial statements.
update are effective for fiscal years beginning after December
In January 2016, the FASB issued ASU 2016-01, Financial
15, 2017. An entity should apply the amendments by means
Instruments – Overall (Topic 825-10): Recognition and
of a cumulative-effect adjustment to the balance sheet as of
Measurement of Financial Assets and Financial Liabilities. The
the beginning of the fiscal year of adoption. The amendments
objective of this update is to enhance the reporting model for
related to equity securities without readily determinable fair
financial instruments to provide users of financial statements
values should be applied prospectively to equity investments
with more decision-useful information. The amendments
that exist as of the date of adoption. The Company notes this
in this update make the following eight improvements to
new guidance will apply to its reporting requirements and
generally accepted accounting principles:
will implement the new guidance accordingly and is currently
evaluating the impact this new guidance will have on its
1. Equity investments (except those accounted for under
financials.
the equity method or that result in consolidation of the
investee) are to be measured at fair value with changes in
fair value included in net income. However, an entity may
choose to measure equity investments without readily
determinable fair values at cost minus impairment, if any,
plus or minus changes resulting from observable price
changes in orderly transactions for identical or similar
investments of the same issuer.
2. A qualitative assessment is required for investments
without readily determinable fair values in order to
identify impairment. If impairment is identified, the
investment is to be measured at fair value.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes. This update, which is part of the FASB’s
larger Simplification Initiative project aimed at reducing
the cost and complexity of certain areas of the accounting
codification, requires that deferred tax liabilities and assets
be classified as noncurrent in a classified statement of
financial position, which eliminates the requirement that an
entity separate deferred tax liabilities and assets into current
and non-current amounts. This update does not affect the
current requirement that deferred tax liabilities and assets of
a tax-paying component of an entity be offset and presented
as a single amount on the balance sheet. This amendment
3. The requirement to disclose the fair value of financial
applies to all entities with a classified statement of financial
instruments measured at amortized cost is eliminated
position. For public business entities, this update is effective
for non-public business entities.
for fiscal years beginning after December 15, 2016, and
4. The requirement to disclose the method(s) and significant
assumptions used to estimate the fair value of financial
instruments measured at amortized cost is eliminated for
public business entities.
5. Public entities are required to use the exit price notion
when measuring the fair value of financial instruments for
disclosure purposes.
interim periods within those annual periods. The Company
notes this guidance will apply to its reporting requirements
and has implemented the new guidance effective with the
current 2016 fiscal year reports.
In July 2015, the FASB issued ASU 2015-11, Inventory
(Topic 330): Simplifying the Measurement of Inventory. This
objective of this update is to simplify Topic 330, which currently
requires an entity to measure inventory at the lower of cost
or market. Market could be replacement cost, net realizable
33
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
value, or net realizable value less an approximately normal
profit margin. The amendments in this update do not apply
to inventory that is measured using last-in, first-out (LIFO) or
the retail inventory method. The amendments apply to all
other inventory, which includes inventory that is measured
using first-in, first-out (FIFO) or average cost. An entity should
measure inventory within the scope of this update at the lower
of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business,
less reasonably predictable costs of completion, disposal,
and transportation. The update will be effective for fiscal years
beginning after December 15, 2016. The Company currently
applies a lower of cost or market and is currently assessing
the magnitude of the difference between using market value
versus net realizable value; however, it is not anticipated to
have a material effect on the Company’s financial.
In August 2014, the FASB
issued ASU 2014-15
Presentation of Financial Statements—Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern. The new
standard provides guidance around management’s responsi-
bility to evaluate whether there is substantial doubt about an
entity’s ability to continue as a going concern and to provide
related footnote disclosures. The new standard is effective for
fiscal years ending after December 15, 2016. Early adoption
is permitted. After adoption the Company will assess going
concern based on the guidance in this standard
.
Dynatronics Corporation Notes to Consolidated Statements June 30, 2016 and 2015
34
AVAILABILITY OF FORM 10-K
GENERAL INFORMATION
Dynatronics Corporation files an annual report on Form 10-K
Dynatronics Corporation, a Utah corporation organized
each year with the Securities and Exchange Commission. A
on April 29, 1983, manufactures, markets and distributes
copy of the Form 10-K for the fiscal year ended June 30, 2016,
a broad line of therapeutic, diagnostic and rehabilitation
may be obtained at no charge by sending a written request to:
equipment, medical supplies and soft goods, and treatment
tables to an expanding market of physical therapists, sports
Mr. Jim Ogilvie, Director of Business Development and IR
medicine practitioners and athletic trainers, chiropractors,
Dynatronics Corporation
7030 Park Centre Drive,
Cottonwood Heights, Utah 84121
podiatrists, orthopedists, and other medical professionals.
OFFICERS AND DIRECTORS
Kelvyn H. Cullimore, Jr.
ANNUAL MEETING
The company’s annual shareholder meeting will be held at
Chairman of the Board, President and CEO
Dynatronics’ corporate headquarters on December 16, 2016
David A. Wirthlin
Chief Financial Officer
T. Jeff Gephart
Senior Vice President of Sales
at 3:00 pm MT.
7030 Park Centre Drive,
Cottonwood Heights, Utah 84121
Douglas G. Sampson
ACCOUNTANTS, LEGAL COUNSEL AND TRANSFER AGENT
Vice President of Production and R&D
BDO USA, LLP, Salt Lake City, Utah
Bryan D. Alsop
Independent Registered Public Accounting Firm
Durham Jones & Pinegar, Salt Lake City, Utah
Vice President of Information Technology
Corporate Legal Counsel
Kirton & McConkie, Salt Lake City, Utah
Intellectual Property Legal Counsel
Interwest Transfer Company
P.O. Box 17136, Salt Lake City, Utah 84117
Transfer Agent
DYNATRONICS CORPORATION HEADQUARTERS
7030 Park Centre Drive, Cottonwood Heights, Utah 84121
1.800.874.6251, http://www.dynatronics.com
Erin S. Enright
Director
David B. Holtz
Director
Scott A. Klosterman
Director
Brian M. Larkin
Director
R. Scott Ward, PT PhD
Director
Corporate Information
35
Dynatronics Corporation
7030 Park Centre Dr., Cottonwood Heights, Utah 84121
1.800.874.6271 — www.dynatronics.com
2016 Annual Report